Rao2014 PDF

Accepted Manuscript
Title: The Role Ofphysical Distributionservicesas

Determinants Of Product Returns In Internet Retailing
Author: Shashank Rao Elliot Rabinovich Dheeraj Raju
PII:
DOI:
Reference:
S0272-6963(14)00049-7
http://dx.doi.org/doi:10.1016/j.jom.2014.06.005
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Accepted date:
20-5-2013
21-6-2014
25-6-2014
Please cite this article as: Rao, S., Rabinovich, E., Raju, D.,The Role Ofphysical
Distributionservicesas Determinants Of Product Returns In Internet Retailing, Journal
of Operations Management (2014), http://dx.doi.org/10.1016/j.jom.2014.06.005
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ShashankRao, Ph.D.*
Jim W. Thompson Assistant Professor of Business
Raymond J. HarbertCollege of Business
Auburn University
405 West Magnolia Avenue
Auburn, AL 36849
Shashank.Rao@auburn.edu
Ph. (334)844 6845
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THE ROLE OFPHYSICAL DISTRIBUTIONSERVICESAS DETERMINANTS OF

PRODUCT RETURNS IN INTERNET RETAILING
an
Elliot Rabinovich, Ph.D.

John G. and BarbaraA.BebblingProfessor of Business
ArizonaStateUniversity
W. P. CareySchool ofBusiness
Tempe, AZ85287-4706
Elliot.Rabinovich@asu.edu
Ph.(480)965 5398
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Dheeraj Raju, PhD

Assistant Professor and Statistician
UAB School of Nursing
The University of Alabama at Birmingham
NB 1019F
1720 Second Avenue South
Birmingham, AL 35294-1210
Seeth001@uab.edu
Ph. (205) 975 5336
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* Corresponding Author
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ABSTRACT
Pressure continues to build on internet retailers to squeeze out inefficiencies from their day to
day operations. One major source of such inefficiencies is product returns. Indeed, product
returns in Internet retailing have been shown to be, on average, as high as 22% of sales. Yet,
most retailers accept them as a necessary cost of doing business. This is not surprising since
many retailers do not have a clear understanding of the causes of product returns. While it is
known that return policies of retailers, along with product attributes, are two important factors
related to product return incidents, little is known about which aspects of the online retail
transaction make such a purchase more return-prone. In the current study, we seek to address this
issue. We use a large data set of customer purchases and returns to identify how process
attributes in physical distribution service (PDS) influence product returns. The first attribute
involves perceptions of scarcity conditions in inventory availabilityamong consumers when
retailers reveal to consumers information on inventory levels for the products that they intend to
buy. Our results show that orders in which items are sold when these conditions are revealed to
shoppers have a higher likelihood of being returned than orders in which these conditions are not
revealed. While prior research has argued that inventory scarcity perceptions have an effect on
purchases, our findings suggest that they are also related to the likelihood of these purchases
being returned. The second attribute involves the reliability in the delivery of orders to
consumers. We find that the likelihood of orders being returned depends on the consistency
between retailer promises of timeliness in the delivery of orders and the actual delivery
performance of the orders. Moreover, we find that the effect that consistency in the delivery has
in the likelihood of returns, is stronger for orders that involve promises for expedited delivery
than for orders with less expeditious promises. That is, although the occurrence of returns
depends on the delays in the delivery of orders to consumers relative to the initial promises made
by the retailers, this effect is more notable for orders that involve promises of fast delivery.
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Keywords: Online Retailing; Electronic Commerce; Order Fulfillment; Returns; Physical Distribution
Acknowledgements The authors would like to sincerely acknowledge the assistance provided
by several colleagues during the development of this manuscript - C.CliffordDefee, Brian
Gibson, and Bill Hardgrave (all at Auburn University) for the academic assistance, and Scott
Talley and Randy Salley for the practitioner assistance. Any errors and omissions however, are
our own.
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THE ROLEOF PHYSICALDISTRIBUTIONSERVICESASDETERMINANTSOF

PRODUCT RETURNS IN INTERNET RETAILING
1. Introduction
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While the Internet has improved customers ability to search and find products best suited
to their needs (Brynjolfsson and Smith, 2000), important limitations still exist that prevent
shoppers from using the Web to efficiently fulfill their demands. Proof of this lies inthesizeable
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amount of product returns that retailers routinely receive from customers (Guide and van
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Wassehnove, 2009). According to recent industry reports, average return rates for products
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purchased online have reached levels as high as 22% (Demery, 2010). In contrast, product return
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rates average a more reasonable 8.1% to 8.7% for traditional retailers, according to 2013 reports
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by the Retail Equation and the National Retail Federation1. This difference in return rates
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indicates that there are elements in online retail transactions that make the merchandise highly
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susceptible to returns, relative to traditional retail transactions.
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Despite such a clear preponderance of returns in online retail, there is limited extant
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research on this issue. It has been argued within the Operations Management (OM), Supply
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Chain Management (SCM), and Marketing literaturesthat there is a lack of theory-driven
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research on returns,as a whole (Mollenkopf et al. 2011),and in online retailing contexts,in
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particular (Griffis et al., 2012-a; Petersen and Kumar, 2009). Even the limited research that
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exists on this subjecthas focusedlargely on policy issues like optimal return strategies for Internet
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retailers (Wood 2001; Nasr-Bechwati and Siegel, 2005; Ofek et al., 2011) and onthe
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Please refer to:

https://www.theretailequation.com/Retailers/images/public/pdfs/white_papers/wp_TRE4010_WhitePaper_Optimizin
gValueofReturns_Jan2013.pdf
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management of returns once they occur (Mollenkopf et al., 2007; Griffis et al., 2012-a).
Someprior research hasbeen carried out into the causes of returns, and it has shown that returns
canoccur due to specific product characteristics (e.g., Petersen and Kumar, 2009), particularly on
the Web,where customers are limited in their ability to properly evaluate certain products
(e.g.,apparel) that require close inspection and evaluationprior to purchase (Peck and Childers,
2003).It has also been argued that it is difficult for customers to evaluate products that are newer
or are more obscure and are, therefore, less available for inspection and comparison on and off
the Web. As a result, such products aretypically more return-prone (Rabinovich et al., 2011).
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However,given that scholars have recognized that customer predispositions and
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behaviors(including returns)are shaped by a combination of market policies, product
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attributes,and process (encounter-related) attributes (Humphreys and Williams, 1996), it would
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be fair to argue that, along withreturnpolicies (e.g., Anderson et al., 2009; Mollenkopf et al.,
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2007; Wood 2001) and product attributes outlined in prior researchin Internet retailing (e.g.,
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Rabinovich et al. 2011; Petersen and Kumar, 2009), there are severalprocess attributes that may
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predispose certain sales transactions between Internet retailers and customers to be more return-
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prone than others. But, while market policies and product attributes have received some attention
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in the literature as discussed earlier, process attributes have remained relatively
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unexplored.These process attributes encompass the entirespan of purchase transactions on
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theInternet starting at pre-salesbuyer-seller interactions and ending atpost-sales exchanges
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after customers have paid for their products (Humpreys and Williams, 1996; Marshall et al.,
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2003; Heim and Field, 2007).
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In this paper, we focus particularly on process attributes for physical distribution services
(PDS) to show that the disclosure of scarcity conditions in inventory availability to consumers
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prior to purchasing products and the post-sale deliveryreliability of purchased goods are
keypredictors of product returns in Internet retailing transactions. Our results show that orders in
which shoppers are aware of scarcity conditions in inventory availability, have a higher
likelihood of being returned than orders in which these conditions are not manifest. While prior
research has argued that perceptions of inventory scarcity by consumers have a strong effect
onpurchases, our findings suggest that they have a substantial effect on the likelihood of these
purchases being returnedas well. We also find that the likelihood of orders being returned
depends on the consistency between retailer promises of timeliness in the delivery of these orders
and their actual delivery performance. Moreover,we find that the effect that consistency in the
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delivery has on the likelihood of returns is stronger for orders that involve promises of fast
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delivery than for orders with promises ofless speedydelivery. Thus, although the occurrence of
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returns is likely to result from delays in the delivery of orders to consumers relative to the initial
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promises made by the retailers, this effect is more notable for orders that involve fast delivery
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promises. This extends prior studies that have focused on the existence of a relationship between
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quality in the delivery of orders to customers and perceptions of customer satisfaction to
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articulate and validate the effect caused on actual product returns by inconsistencies between
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retailer promises of timeliness in the delivery of Internet orders and actual delivery performance.
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Identifying such process attributes effects on the occurrence of product returns is an
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issue that deserves focused research for one central reason- if these attributes arefound to be
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related to a higher return-likelihood of a purchased item, then thiswould give online retailers
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enhanced predictability with respect to product returns. Our focus on PDS attributes and their
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effects on product returns extends OM research in online retailing that has studied the role of
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order fulfillment and return operations and their implications for customer satisfaction, customer
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loyalty, purchase behavior, and firm profitability (e.g., Rabinovich and Bailey, 2004; Rabinovich
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et al., 2007;Rabinovich et al., 2008; Boyer and Hult, 2005; Boyer and Hult, 2006; Boyer et al.,
2009; Thirumalai and Sinha, 2005; Griffis et al., 2012-a).In doing so, our work at a more general
level,also adds to research that has focused on studying relationships between OM and
Marketing (e.g., Sawhney and Piper, 2002; Malhotra and Sharma, 2002; Hausman et al., 2002).
The remainder of this paper is organized as follows. The next section provides a review
of the literature, an introduction to the theoretical background, and the hypotheses development.
The research methodsare then presented in the third section, followed by the data analyses in the
fourth section. Finally, the fifthsection presents a detailed a discussion of the
results,implications, and future research opportunities, while the sixth section concludes.
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2. Literature Review and Theoretical Background
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The study of productreturns in the OM and SCM literaturesspans the areas of product
recovery and closed loop supply chains (Ketzenberg and Zuidwijk, 2009).In these areas, the
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activities and research insightsfall into three categories (Guide and van Wassenhove, 2009). The
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first category deals with the front end of the supply chain and focuses on the customersproduct
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return / return decision itself. The second consists of operational issues about remanufacturing,
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while the third is devoted to market development of remanufactured products. Although research
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has investigated operational issues regarding remanufacturing (e.g., Atasu et al., 2008; Souza et
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al., 2002; Ketzenberg et al., 2003) and market development of remanufactured products (e.g.,
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Guide and Li, 2010; Vorasayan and Ryan, 2006),research on customer return decisions is scant.
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This is especially true in online retail contexts, where a substantial amount of research has
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focused on forward (i.e., getting the product to the consumer), rather than reverse supply chain
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management (Griffis et al., 2012-a; Petersen and Kumar, 2009). Thus, the remainderof
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ourliteraturereview focuseson this direction.
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As far as customer return decisionson or off the Internetareconcerned, two key
investigation-worthy issues jump to mind:why customers return products and what the value
proposition of these returns is in the customersminds.The latter question has been addressed,to a
large extent, by authors who have examinedhow the value of the returns proposition in the
customers eyesmay benefit the customer and the firm. For example, research has demonstrated
that product returns can result in increased follow-on spendingwith theretailer, thus suggesting
that the act of returningaproduct enhances customer confidence with the retailer (Griffis et al.
2012-a). Similarly, Petersen and Kumar (2009) haveshownthat this increased expenditure is not
just restricted to the short term, but can be extended to customers lifetime values as well. At a
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more general level, Wood (2001) argues that leniency in return policies increases purchase rates
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for customers in remote purchase situations. From a manufacturers standpoint, Padmanabhan
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and Png (1997) show that lenient return policies also create sources of competitive advantage for
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retailers and manufacturers, thus alluding to the notion of the value of the returns proposition in
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customers minds.Extending this idea, recent research has focused on identifying return
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strategies that provide optimal value to both buyers and sellers (e.g., Ketzenberg and Zuidwijk,
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2009; Su, 2009; Shulman et al.,2009; 2011).
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The former question (understanding why customers return products) has alsoreceived
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attention by prior research, but to a much lesser extent than the question about the value of
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product returns for consumers. Scholars have recognized that customer behavior (including
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returns) is shaped by a combination of product attributes and process (transaction-related)
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attributes (Humphreys and Williams, 1996). Along the product-attributes front, research on
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commercial returns of consumer goodshas demonstrated that returns can be driven by factors
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such asdefects, product incompatibility with user needs, and deficiencies in product performance
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relative to customer expectations (Guide etal. 2006;Ferguson et al.2006). Researchon returns in
online retailing has also examined the role played by products valuations and popularity among
consumers (Rabinovich et al.,2011). In addition, among the process attributesof thetransactions,
it has been shown that attributes, such as the extent of disconfirming (negative) information prior
to purchase, affects the decision to return a product (Nasr-Bechwati and Siegal, 2005). But, to
the best of our knowledge, no research has considered how process attributes in the transaction
that are specifically related to PDSgenerate product returns, particularly in Internet settings.
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Understanding such PDS process attributes effects on product returns is important for
online retailers because these firms are typically younger and less experienced in how to prevent
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returns than conventional retailers (Rao et al., 2009).In addition, online retailers are more likely
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to be exposed to false returns or return fraud (e.g.,when products are purchased purely for the
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purpose of returning) something that is arguably also prevalent in conventional retail, but is
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likely easier to control through efficient returns gatekeeping at the point of sale.Finally, PDS is
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an extremelyimportant part of onlineretailsales sinceit is what completes the retailtransaction and
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finallyputs the product in thehands of the endcustomer (Esper et al., 2003). Thus, online retailers
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would benefit greatly from understanding what PDS attributes of the online retail transaction are
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significantly relatedtoconsumers decisions about returns. The remainder of this
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sectionaddresses this issue by building a theoretical model of product return antecedents in
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online retailing. As argued earlier, our focus is on the PDS process attributes of the online retail
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transaction rather than market policies or product attributes. Because the role of market policies
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and product attributes in returns has received substantial attention in the literature, we treat them
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as control factors in our study. We expand on these controls in our research methods section.
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2.1. Conceptual Framework
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When assessing the outcomes of a transaction, customers go through an evaluation

process where they judge the extent to which the outcome from the transaction has delivered
upon their desires. Depending on whether this outcome meetsthese desires, customers will
experience positive or negative emotions and will develop coping responses that are manifested
in future behaviors (Bagozzi, 1992). This process was originally introduced by Lazarus (1991)
who proposed a framework to explain the process by which consumers assess a transactionor an
exchange and develop future intentions and behaviors. This framework consists of three stages:
(1) customers appraisal, (2) service providers response, and (3) customers coping behaviors.
In the context of retail exchanges on the Internet, the appraisal stage focuses on
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customers assessments of excellence of the products or services that are to be provided by
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retailers (Griffis et al., 2012-b). The assessments during this stage depend oncustomers
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perceptions of expected quality of products or services (Cronin and Taylor, 1992). During this
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stage, customers assess different attributes in the retailers offers to form expectations, prior to
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placing their purchases, aboutthe goods orservicesthat theywillreceive (Griffis et al., 2012-b).
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Moving onto the response stage, researchers have embraced Olivers (1981, 1997) view
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of customer satisfaction, defined as the emotional assessment of the ability of a service provider
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to deliver a pleasurable amount of consumption-related fulfillment. Based on this definition,
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measures of satisfaction have proven effective to account for emotional responses of customers
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in the assessment of retail exchanges (Cronin et al., 2000). It is during the response stage that
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customers get to experience and evaluate attributes in the retailers offers and develop a measure
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of satisfaction based on initial expectations formed during the appraisal stage (Griffis et al.,
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2012-b). In this sense, Internet retail transactions are different from traditional retail transactions,
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given that there is usually a time difference between the appraisal and response stages (when
customers await delivery of theiritems), which may not be present in traditional retail.
The response stage is followed by the coping stage. During this stage, customers get to
react to what they have observed and experienced in the previous two stages. These reactions are
reflected in the customers conduct or behavioral intentions actions such as deciding to return
products, purchase again from the retailers, or recommend the retailers to others (Nyer, 1997).
Taken together, thesethreestagesform the foundation for thedevelopment of our
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hypotheses. Based on thesehypotheses, wewillexaminethe role played by PDS process attributes
in online retail sales during the appraisal and response stages in shaping customers coping
behavior in the form of the occurrence of returns.
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2.2. Hypotheses
PDS involveprocessesaimed at ensuring that customers receive their orders in an accurate
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and timely manner (Bowersox and Closs, 1996; Perreault and Russ, 1976; Bienstock et al.,
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1997).In online retailing, PDS are characterized by (1) inventory availability, (2) timeliness(i.e.,
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order delivery cycle time) expectation,and (3) reliability in order delivery (Rabinovich and
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Bailey, 2004).Forour hypotheses,wefirstconsidercustomer perceptions of inventoryavailability
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and customerexpectations of delivery timeliness (the first two dimensions of PDS). These
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perceptions and expectations are formed in the appraisal stage of the online retail exchange
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model discussed in Section 2.1. We subsequently focus on the response stage of the retail
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exchange, where customers get to evaluate thethird attribute in PDS: reliability in order delivery.
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Based on our conceptual development, we then relate the PDS attributes in the first two stages to
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the outcome variable of interestin the copingstage ofthe retail exchange model (productreturns).
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InventoryAvailability. In traditional retail settings, customers perceptions of inventory

availability are based on environmental cues involving product displays, shelf space size, and
customer traffic(Jacoby, 2002). Without access to such cues in online retailing, customers are
circumscribed to assess availability using only textual and visual descriptions in the retailers
websites, informing them whether products are in-stock or not or specifying the number of
products left in inventory. Limiting customers access to this information makes it difficult for
them to evaluate inventory availability relative to product demand rates. This, in turn, can
confound their assessment of products true availability and stock-out risks.
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Moreover, customers sole reliance on textualdescriptions about products in-stock
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availability on the Internet makes them easily susceptible to scarcity heuristic effects in their
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appraisal of Internet retailer offers.The scarcity heuristic can be understood as a manifestation of
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the belief that items and opportunities [to buy them] become more valuable as they become
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less available (Cialdini, 2001; p. 78). Ditto andJemmott (1989) argue that if consumers perceive
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that an item is in short supply, they will assume that it is worth buying and that this leads to
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systematic errors in judgingthe true value of products. The principle is founded on two
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beliefs:(1) items that are difficult to obtain are typically more valuable because the availability of
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an item (or the lack of it) can serve as a short-cut cue to its popularity / quality (Lynn, 1989) and
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(2) when a product becomes less available, free choice is limited or threatened, and this makes
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people want the product significantly more than they would have otherwise (Brehm, 1966).
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The scarcity heuristic has oftentimes been demonstrated in the literature. For example,
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Verhallen (1982) and Verhallen and Robben (1994) found greater preference for books when
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they were perceived as scarce. Similarly, Lynn (1989) found that paintings perceived as scarce
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were more desirable than paintings perceived as readily available. In a meta-analysis, Lynn
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(1991) alsofound a positive relationship between perceived scarcity and value perceptions. The
use of the scarcity heuristic in the marketplaceis also well documented from a practitioner
standpoint. For example,companies in the hospitality and travelindustries often advertise that
availabilities are filling fast or that seats are limited. Similarly, retail advertisements for
products often contain time limits on offers (e.g., 1 week only sale, or this weekend only) or
quantity limits(e.g., maximum 2 items per customer) (Inman et al., 1997).
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We propose that, in an online environment, the scarcity heuristic will
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becomemanifestwhen retailers disclose information about on-hand inventory levels for products.
Indeed, some retailers disclose the number of units theyhaveininventory whenthis amount is
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limited (thus creating a sense of scarcity). For instance, Amazon.comadvertises some items as
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having limited availability (with an associated number of units in stock, e.g., only 3 available).
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The reasons for this communication could be many: from wanting to clear out the last few units
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of inventory and make way for new stock to encouraging purchases by playing on the scarcity
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heuristic.
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This communication of scarcity received by the consumer can then be seen as part of the
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overall appraisal process (Bagozzi, 1992; Cialdini, 2001), similar to how design features of a
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website affect the appraisal process (Eroglu et al., 2003).This appraisal would then trigger an
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increased value perception about the item in the consumers mind, which would make the item a
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highly attractive purchase(Cialdini, 2001; Bagozzi, 1992).This is consistent with the findings of
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Inman et al. (1997, p. 68), who argued that the presence of a restriction operates to activate a
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cognitive resource that renders judgments regarding the favorableness of the offering.
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Note also that in most online retail purchases, customers firstassess the retail offers
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and,after waiting for delivery, get to experience and evaluate the products and services that
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theyreceived.Thus the development ofa complete measure of satisfaction based on the

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initialexpectations is delayed, because there is often a timegap between the assessment of the
online offer and the experiencingof the product. On account of deliverylead times, customers
willonlybeable tofullyand objectively assess theirpurchases upon deliverywhich is decoupled
from the purchaseprocess itself(Peck and Childers 2003).We build on the existence of this
timegap and the scarcity heuristic principle to propose that theenhanced product value
communicatedby original perceptions of scarcityin online offers stands to besubstantially
reduced once customersactually receive possession of and experience the products. This is
because once they receive their products, consumers will be in a position to evaluate the
products intrinsic qualities without the enhanced value communicated by way of the scarcity
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heuristic (once the item is in physical possession, there should be a reduced perception of
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scarcity).One outcome to such adecreased assessmentof the value proposition of
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productspurchased under perceived scarcity conditions would be an increase in the likelihood of
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product returns during the coping stage.This reasoning is consistent with prior research which
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proposes that when people buy on impulse, they are likely to be less happy with their purchases
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(Gardner and Rook, 1988). Thus, weposit that products soldunder perceived scarcityconditionsin
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availability have a higher likelihood of being returned than productssold under non-scarcity
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conditions. This leads to our firsthypothesis.
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H1: Online retail orders in which items are sold under perceived scarcity conditions
in availability have a higher return likelihood than orders in which items are sold
under non-scarcity conditions in availability.
Order Delivery Reliability. Customers assessment of order delivery reliability in Internet
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retail settings is a function of actual delivery performance (observed during the response stage)
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in relation to the expectationsthat are formed during the appraisal stage (Rabinovich and Bailey,
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2004). This is consistent with prior research in long-distance retailing where delivery reliability
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depends on the extent to which retailers can match actual delivery performance to the delivery
performance expectation signaled to buyers (Hutchinson and Stolle, 1968; Gilmour, 1977). In
addition, this conceptualization follows the service reliability construct as outlined in the
SERVQUAL literature, wherein reliability is understood as the ability to perform promised
services dependably and accurately (e.g., Berry and Parasuraman, 1991; Berry et al., 1994). The
relation between order delivery reliability, or the lack of it, and returns behavior is important to
investigate for one central reason.Prior research on customers redress -seeking behavior has
argued that customers will seek redress to a dissatisfying service encounter depending on their
impressions of locus and controllability (Weiner, 1985; Weiner, 2000). What this implies isthat
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customers are likely to demonstrate redress seeking behavior depending on whether they feel
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they can attribute blame exclusively to a single party for the failure in the encounter (locus) and
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whether they feel that the party was in a position to avoid the failure (controllability) (Weiner,
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1985; Folkes, 1984; Folkes et al., 1987; Bitner, 1990). The Internet retailing environment is
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unique in this regard because mostretailers are not autonomously incharge of performing order
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deliveries to customersand instead, share this responsibility withthird party logistics providers.
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Thus, it is unclear whether customers will feel comfortable assigning the blame (i.e., locus and
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controllability) for low reliability in deliveries purely to the retailers (given that delivery
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reliability is at least partially controlled by logistics providers).As aresult, it is notobvious
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whether customers will generate product returns (i.e., demonstrate redress seeking behavior) in
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the face of delivery reliabilityfailures, since they will be unclear as to whether theycan
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attributethe blameto the retailers or not (Weiner, 1985). This could bepartly why, to thebest of
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ourknowledge,this issue has not been addressed in theliterature.
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While prior research on redress seeking behaviordoes come up short in predicting return
likelihood in the face of delivery reliability failures in an Internet retailing context, the
Expectation Confirmation Theory (ECT) (Oliver, 1980) proves a useful resource to investigate
this relationship. According to the ECT, when a customers actual service outcome meets or
exceeds her expected outcome, there is positive disconfirmation which results in satisfaction
(Bearden and Teel, 1983; Oliver and DeSarbo, 1988; Susarla et al., 2003). Conversely, when
expectations are not met, the customer will experience negative disconfirmation and
dissatisfaction (Oliver, 1980, 1997; Bearden and Teel, 1983). Indeed, research(e.g., Bitner, 1990;
Bitner and Hubbert, 1994; Boulding et al., 1993; Kelley et al., 1993; Smith et al., 1999; Harris et
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al., 2006) hasshown that service encounter satisfaction (dissatisfaction) leads to greater (lower)
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overall perceived service satisfaction. Similar to the SERVQUAL literature (e.g.,Parasuraman et
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al., 1994; Zeithaml et al., 1996; Zeithaml, 2000), the ECT paradigm visualizes the delivery gap
13
as the difference between the apriori expectations of service, and the levels of service actually
14
received (Susarla et al., 2003; Venkatesh and Goyal, 2010).
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ECT provides a three-stepflow model to explain responses by customers to service
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performance relative to expectations. First,exposure to information describing a
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servicesperformance characteristics leads to the formation of service specificbeliefs or
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expectations by the customer (Olson andDover 1979). Second, a cognitive comparison between
19
expectationsand actual experiences leads to a subjective calculationof disconfirmation by the
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customer (Oliver et al. 1994). Third, the combinationof expectations and disconfirmation
21
determines a satisfactionlevel that, in turn, influences subsequent behavior by the customer
22
(Venkatesh and Goyal, 2010).
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At abroad level, this three-step flow model is consistent with theappraisal response
coping model ofLazarus (1991).This flow model provides a reference to understand customers
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assessments of order delivery reliability in the online retail exchange context. Consistent with
Lazarus (1991) framework, these assessments are a function of customers cognitive
comparisons of actual delivery experiences during the response stage relative to expectations
formedby customers when receiving information during the appraisal stage about delivery
performance promises.It has been argued that, in an online retail setting, customers face
asymmetric information on delivery performance because when they buy from retailers they can
only estimate the expected (not the actual) deliveryperformance that they will receive through
their interaction with the retailers websites (Rabinovich and Bailey, 2004).Thus, because
customers cannot ascertain actual delivery performance prior to giving retailers their business,
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this delivery performance measuredthrough order cycle times plays a key role in customers
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assessments of their exchanges with Internet retailers (Griffis et al., 2012-b).
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This explains why order cycle times havebecome a key component of the overall value
13
proposition provided by online retailers. While location remains a key determinant of success
14
for conventional retailers, the importance of location in an online context is substantially reduced
15
(Esper et al., 2003). Ratherthanlocation, customersatisfactionoften hinges
16
uponhowwellonlineorders are delivered to their destinations (Alba et al., 1997; Boyer and Hult,
17
2005; Rabinovich and Bailey,2004). When orders are not delivered within their expected times,
18
customers consider them service failures by Internet retailers(Rao et al., 2011) and when such
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service failures occur, the customers perceived value of their service encounters is lowered
20
(Smith and Bolton, 1998; Bolton, 1998), consistent with ECT.This suggests that a decrease in
21
performanceindeliveryreliability the extent to which actualorder deliveryperformance falls short
22
of expected deliveryperformance shouldgeneratedissatisfactionwith the retailersamong
23
customers.It remains tobedetermined whether,as inferred byReinartzand Kumar (2003),Stock et
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al. (2006), andDaughertyetal. (2003),customer dissatisfactiondirected atretailersis a cause
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ofproduct returnswhen the focus is on deliveryreliabilityin online purchases by consumers.If this
werethe case,adecreasein performancein deliveryreliabilityshouldincrease the risk that online
customers willreturn theirproducts. Oursecond hypothesisencapsulates this potential effect.
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H2: Delivery reliability for an online retail order is negatively related to the orders
return likelihood.
Expectation of Delivery Timeliness. Past empirical applications of the ECT havelead
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generally to linear operationalizations of expectation-confirmation gaps, suggesting that actual
service performance levels should increase proportionately withexpectations(e.g.,Szajna and
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Scamell, 1993). However, recent studies have questioned the validity of this assumption and
11
haveargued in favor of the existence of a non-linear relationship between service performance
12
levels and expectations (Edwards, 2002; Staples et al., 2001; Brown et al., 2013). These studies,
13
which have drawn from the Assimilation-Contrast Model (Anderson, 1973), posit that the more
14
extreme an experienced stimulusis vis--vis the expected stimulus, the more likely it is that
15
positive or negative reactions will be experienced and that the magnitude of these reactionswill
16
be non-linear. Moreover, according to Chebat et al. (2005), the extent to which customers seek
17
redress in the face of a service failure depends on the magnitude of the failure itself. Thus,as
18
customers begin to seek redress (i.e., returning the product), the extent to which they engage in
19
such behavior will depend on the extent of deviation from the expected service.As service
20
expectations increase, a proportional increase in actual service performance will not be enough to
21
preserve satisfaction; instead, service performance mustimproveat an increasing rate as a priori
22
expectations go up(Brown et al., 2013; Bearden and Teel, 1983; Szymanski and Heard, 2000).
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Given that in online purchases customers self-select into different categories of delivery
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service (e.g., next day delivery, 7 day delivery) when choosing how to get their orders sent to
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their destinations, customers who self-select into premium servicecategories (e.g., next day
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delivery) will have higher expectations of delivery speed than those who self-select into other
categories. Consequently, the deleterious impact of an equal delay in order delivery will be
higher for the former group than it will be for the latter group.
These arguments suggest that customers a priori expectations ofdeliverytimeliness (e.g.,
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the number of days promised for delivery)will interact with actual delivery reliability to
influence their likelihood of engaging in product returns, as stated in H2.Specifically, an increase
in the level of customers initial expectations of delivery timeliness for their orders will
attenuateany impact that the orders delivery reliability may have on the likelihood of the orders
being returned. This leads to our third hypothesis.
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H3: Customer expectations of order delivery timelinessmoderate negatively

(attenuate)the effect byactual order delivery reliability on product returns.
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3. Research Methods
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3.1. Data Source
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online retail exchanges introduced in Section 2.1), we use transaction level data from a retailer
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based in the United States.The retaileroperates channels based on the Internet, catalogs, and
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physical stores and specializes in selling jewelry products, time-pieces,andothersuchproducts,
20
allof which fall within the personal accessory category. For the purposes of our study, we
21
focused exclusively on the retailers Internet channel. At the time of our study, this channel had
22
been in operation for over 5 years and had sold in excess of 100,000 items. Annual sales through
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this channel positioned this retailer among the largest 500 online merchants in the U.S.,
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according to rankings by Internet Retailer magazine.
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To empirically test our model (illustrated in Figure 1 along with the different stages in
[Insert Figure 1 Here]
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Our decision to focus on a single firm is consistent with prior empirical research on
Internet retailing (e.g., Olson and Boyer, 2003; Rabinovich et al., 2011; Rao et al., 2011). Given
the nature of our research, where the focus is on individual customer behavior rather than on firm
conduct, the use of a focal-company setting does not compromise the validity of the results
because our unit of analysis is at the customer transaction level, and not at the firm
level.Furthermore, the use of a focal company setting allows us to test our hypotheses without
firm-level confounding issues involving disparate product return policies and different levels of
brand recognition and loyalty among consumers that may influence the likelihood of product
returns.
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Because the retailer sells fashion intensive, specialty merchandise, product returns in our
empirical setting tend to bedriven by product pricing, quality, and aesthetics considerations just
12
as much as they are bythe product availability and deliveryfactors at the center of our model.
13
This condition provides us with a critical settingto test our hypotheses. Arguably, if we can
14
validate our hypotheses in this setting, where attributes other than those involved in the PDS
15
process itself are key determinants in customers product return-decisions, this validationislikely
16
to hold in other online retail settings involving products like groceries, where factors such as
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fashion are less importantwhile product availability and delivery are more critical.
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Moreover,our focus on fashion intensive, specialty products contributed to generate
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results that carry substantive validity relative to other contexts in which firms sell commoditized
20
goods (e.g., books) that are mass marketed across many retail sites and for which scarcity is not a
21
common occurrence. The products in our study are also less subject to high rates of false returns
22
causedby productobsolescence or bybuyersinability touse the products dueto theircomplexity.
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These false-return incidents are more common when items like electronics are involved.
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A final consideration in testing the hypotheses involves the nature of the retailers return
policy at the time of our study. As part of its policy,the retaileroffered an exchange or a refund
for the value of the products (but not the cost of shipping and handling)on all returns received
within 30 days of the purchase. Moreover the retailer did not pay for return shipping.The
stringency of this policy is about average for the industry segment in which the retailer competes.
For example,threeof the retailers four largest competitors within its product category also offer
return windows of 30 days, with the fourth one offering 45 days. Moreover, none of them
reimburse shipping and handling costs associated with the initial purchase or the return of the
products.However, this return policy is somewhat strict, when compared to policies followed by
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well-known retailers in other industry segments. For example, retailers like Zappos.comhave
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instituted policies in which customers face no time restrictions to return products and are
12
refundedboth the financial value of the returned goods, and the shipping and handling fees
13
incurred in initially buying and returning these goods. We contend that therelative stringency in
14
the return policy instituted by the retailer in our study provides us with an opportunity to test our
15
model in a conservativeenvironmentin which indiscriminate product returnsareatypical This
16
allows for anassessmentof our hypotheses withoutan excessiveinterferenceof falsereturns.
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3.2. Data Structure
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The data we used for this study involves 6,732 Internet transactions between the retailer
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and its customers during the entire calendar year of 2010. To ensure uniformity in our evaluation
20
of delivery reliability, we considered transactions that involvedorders fulfilled exclusively within
21
the U.S. We also limited our analysis to orders involving customers who placed only one order in
22
the 2010 calendar year. This guaranteed that we were not dealing with potential confounding
23
effects, where purchases were being made by customers in one time period to replace products
24
that they may have returned earlier. This also ensured that the data included only one transaction
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per customer and, consequently, that the data observations in the analyses were statistically
independent from each other across customers
Finally, we included orders that involved only one item. In so doing, we removed from
the sample orders placed by customers who purchased multiple products topossibly resell them
or to try them out and return some of them later. Arguably, those types of orders (especially the
latter) would have an element of return bias already embedded in them, given that items may
have been purchased with the express intent of returning at least some of them.
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3.3. Main Constructs Operationalization
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independent constructs, Scarcity Condition in Availability, Order Delivery Reliability, and
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Expected Order Delivery Timeliness.We expand on these constructs operationalization below.
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Table 1 summarizestheir operationalization as well as the labels used for the constructs in the
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empirical analysis and theirdescriptive statistics. Table 2 lists their correlation coefficients.
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[Insert Tables 1 and 2 Here]
Product Return.We operationalized the dependent construct in the model by using a
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The model in Figure 1involves a dependent construct, Product Return, and three
18
dummy variable that denotes whether the product in each of the Internet transactions in our data
19
was returned (value of 1) or not(value of 0). A product return was logged into the system when
20
previously purchased merchandisewas actually delivered back to the retailer,after the retailer was
21
able to process the corresponding return merchandise authorization (RMA) form submitted by
22
the customer. As shown inTable 1, the return rate across the orders in our sampleis 15%.
23
Scarcity Condition in Availability.The retailer in our study discloses to customers
24
information on inventory levels for stock keeping units (SKUs) only when those levels are less
25
than or equal to 10 units. We propose that such a disclosure of information regarding a limited
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number of items in stock (e.g., 10 or fewer units) creates perceptions of product scarcity in
customers minds. Thus, we use an array of binary dummy variables to operationalize perceived
scarcity conditions in availability among consumers. In effect, since consumers can access
information on inventory across ten different stock levels (from 1 to 10 units) at the time of
purchase, we usedten variables to capture scarcity conditions in availabilityin each of these
inventory levels. Each of these ten variableslabeled as Scarcity1, Scarcity2,, Scarcity10was
assigned a value of 1 if the amount of inventory disclosed to consumers at the time of purchase
was 1, 2,,or 10 units, respectively, or a value or 0 otherwise. To capture instances in which
SKUs were not sold under perceptions of scarcityconditions in availability, weused anadditional
10
dummy variable (Scarcity11) that was assigned a value of 1 when there was no communication of
11
scarcity received by consumers at the time of purchase in the form of inventory level information
12
(because stocks exceeded 10 units)or a value of 0 otherwise.To test H1, we will use Scarcity11as
13
the baseline against which we will measure the joint effects on the likelihood of returns across
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the first ten dummies (Scarcity1 through Scarcity10) capturing scarcity conditions in availability.
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Order Delivery Reliability.We operationalize this construct as the extent to which (in
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percentage terms)orders are delivered ahead of (or later than) promised delivery times. For
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example, if a particular orders estimated delivery timeis 4 days, but the order is delivered in 3
18
days, its reliability measure is (4-3)/4 = 0.25 or 25%. Similarly, if the same order is delivered in5
19
days, its reliability measure is (4-5)/4 = -25%. The retailer inour study provides customers with a
20
promised delivery time based on where the orders ship from, where they ship to,the orders
21
chosen delivery modes, and the corresponding number of non-businessdays involved in
22
delivering the orders. The actual amount of time spent in delivering the orders is available from
23
the delivery receipts that the retailer obtains from its third party logistics providers.
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Expected Order Delivery Timeliness.As explained above, customers expectations of

order delivery timeliness areoperationalizedusing the promised delivery times for their orders.
For example, customers who are promised overnight delivery (next-day air shipping) would have
an order delivery timeliness expectation score of 1 day, while those who are promised a7 -day
delivery would have a delivery timeliness expectation score of 7. In effect, a lower score on this
measure implies a higher expectation of delivery timeliness.
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3.4. Control Variables
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In our analysis, we account for effects on product returnscaused by several control

variables. We expand on these variables and their expected effects on returnsbelow. Table 1
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summarizes the variables, the labels used for them in the results, and their descriptive statistics.
12
Table 2 lists their correlations.
14
Failures Exogenous to PDS.It is likely that some customers will engage in product
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returns due to failuresthat are external to PDS in our model. Prior work on commercial returns of
16
consumer goods by Guide et al. (2006) and Ferguson et al. (2006) argues that customers are
17
likely to return products if the products delivered are broken or damaged. Moreover, customers
18
arelikely to return products if the information describing the products online is incorrect or
19
flawed. This is because these information errors may induce customers to buy products that will
20
not match their needs or expectations.To account for these contingencies, we follow the lead by
21
Rabinovich et al. (2011) and include two binary (dummy) control variables in which we capture
22
respectively whether a product return in our sample was caused by products that were delivered
23
damaged or broken (1= yes, 0 = no) or by flawed product descriptions on the retailers Internet
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site (1= yes, 0 = no), as reported by customers in their RMAs.
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Product Price Leadership.Returns also depend on the competitiveness of prices offered

by the retailer for each of its products. The online retail business model is heavily price driven
and product price is one of the main factors that determine customers buying decisions. This is
because, on the Web, customers search costs are greatly reduced (Brynjolfsson and Smith,
2000) and price comparisons across retailers are but a few mouse-clicks away (Srinivasan et al.,
2002). Thus, we expect that items sold by a retailer at prices below competition are less likely to
be returned than items priced above competition. Customers are more likely to return items that
are priced above competition because these items carry lower transaction values than items sold
at bargain prices. We use a dummy variable to specify which orders involve items priced by the
10
retailerin our studyabove (value of 0) andat or below (value of 1) competition. We expect to find
11
anegative link between this variableand thelikelihood of returns.
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Product Price. Beyond the competitiveness of prices charged by retailers for their
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products, we expect that high-priced products will be more likely to get returned as compared to
14
low-priced products. This is because consumers will have a stronger motivation to recoup their
15
expendituresand send back their products if theseitems carry higher monetary values (Anderson
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et al., 2009). Thus, we control for the purchase price of products and expect that as product price
17
increases, return likelihood will increase.
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Shipping and Handling (S&H) Price. The fees charged by a retailer to deliver its
19
products to customers may also influence the likelihood of product returns. But the nature of this
20
effectdepends on whether the retailer refunds these fees as part of its return policy or not. Since
21
the return policy by the retailer in our study does not include the reimbursement of S&H fees,
22
weexpect these fees to act as a deterrent against returns. As these fees increase, customers will be
23
less likely to return their products because they will not be able to recoup these expenses.
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Therefore, we expect to see a lower return likelihood for products for which customers pay high
S&H prices than for products for which customers pay low S&H prices.
Purchase History.Customers are likely to be more at ease when appraising offers from
online retailers that they have used in the past, rather than from unfamiliar retailers (Petersen and
Kumar, 2009). Moreover,customers ease in their relationships with retailers should translate into
more frequent purchasing encounters. Thus, customers with on-going relationships with a retailer
are likely to buy items more frequently than brand new customers (Reichheld, 1996; Reinartz
and Kumar; 2002; Petersen and Kumar, 2009). By extension, given that customers with on-going
relationships buy items more frequently from retailers, as compared to new customers, we would
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also expect that the likelihood of observing product returns for a purchase exchange is higher
11
among existing customers than among new customers. To control for this effect, we use a
12
dummy variable to indicate which customers in our data had purchased products from the
13
Internet retailer in the past (value of 0) and which ones had not (value of 1). We identified
14
whether customers had purchased products from the retailer in the past depending on whether
15
their names and addresses had been used in prior purchases from the retailer, before they placed
16
their orders in our data set
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Gifting.Gift receivers usually assign emotional and social value to gifts, thus increasing
18
their utility (Areni et al., 1998; Sheth et al., 1991). In gifting situations, customer perceptions of
19
retail transactions comprise not only a utilitarian consideration (Sherry, 1983), but also a social
20
and emotional component. Sheth et al. (1991, p. 161) define this component as perceived utility
21
acquired from anassociation with one or more specific social groups. As a result, in making
22
product return decisions, gift receivers will take into consideration the social and emotional value
23
obtained from gifts, in addition to their transactional value. Therefore, because purchases
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involving gifts carry not only a utilitarian but also an emotional and social value, we expect that
they will have a lower likelihood of being returned than purchases in which no gifts are involved.
This expectation is consistent with findings by Petersen and Kumar (2009). Thus, we
follow these authors lead and control for the effect that gifts have on the likelihood of returns by
using a dummy variable to indicate which purchases in our data involved gifts (value of 1) and
which ones did not (value of 0). We expect to observe a negative relationship between this
variable and the likelihood of product returns. We identified those orders in our dataset that
involved gifts based on whether the orders billing names and addresses matched their mailing
names and addresses. If the two did not match, we inferred that the orders involved gifts.
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Seasonality.In our setting, customers return decisions have seasonality built into them,
especially around the holidays. We expect a higher likelihood of returns during the holidays
12
because there ishistorically a greater risk that shoppers will reconsider their purchases and send
13
back products bought during this time of the year (Petersen and Kumar, 2009). As a result, we
14
control for seasonality effects on returns involving orders placed between the week before
15
Thanksgiving 2010 and December 31, 2010. We use a dummy variable to categorize seasonal
16
orders (with a value of1)and non-seasonal orders (with a value of 0).
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Product Popularity.As such, products that are sold more often will most likely be
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returned more often (Rabinovich et al., 2011). Therefore orders that involve more popular
19
products are likely to carry a greater return likelihood as well. We operationalize product
20
popularity as a function of each products annual sales in the year prior to the time the order was
21
placed. Because sales for a small fraction of items were disproportionately larger than the rest of
22
the items, we rescaled this measurement using a natural log. This operationalization for
23
popularity is consistent with Rabinovich et al.s (2011) operationalization of a similar variable.
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1
2
3
4
4. Data Analysis and Results

As described earlier, we specified whether each item in the orders in our datasetwas
eventually returned or not and created a binary dependent variable,Return.Because weusea
binarydependent variable to operationalizethe occurrenceof product returns,we choseto
usealogistic regression to test thehypotheses. Moreover,following prescribed best practices in the
study of moderated models (c.f., Aguinis et al, 2013), we tested the hypotheses using hierarchical
multiple regression (Cohen and Cohen, 1983; Davison et al.,2002). Aguinis et al, (2013) propose
10
a multi-step approach to statistically test such type of models. Based on this approach, one must
11
first test a controls only model in which the dependent variable (Return) is regressed upon all
12
control variables. Subsequently, one must build a direct effects model that includes first-order
13
paths linking all independent variables (including all control variables and moderators) with the
14
dependent variable. Finally, one must build a model in which interaction variablesare added as a
15
function of the product of their first-order variables. The statistical significance of these
16
interaction variables would indicate moderation and complete the test in the overallmodel.
17
To test our hypotheses, we used a similar three-step approach. We first entered the
18
control variables in the model (Model 1).Subsequently, we introducedto the model (Model 2) the
19
controls and the variables that account forthedirect effects in H1 and H2 (i.e.,Scarcity1,
20
Scarcity2,,Scarcity10, and Reliability) along with a direct effect by the moderator
21
(i.e.,Timeliness Expectation). Finally, we tested the model with the interaction effect proposed in
22
H3, while keeping the direct effects of H1 and H2, along with the controls, in the model (Model
23
3).The results are presented in Table 3. The significance level of the Hosmer and Lemeshow
24
testfor all modelswas above 0.05, indicating that lack of fit is not a concern with any of the
25
models.Therefore, we proceed with a discussion of the modelsexplanatory and predictive
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validity tests and the results from the independent variables coefficientsand their support for the
hypotheses.
[Insert Table 3 Here]
4.1. Explanatory Validity Tests
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As reported in Table 3, Models 1, 2, and 3 have statistically significant 2 coefficients (p<

0.01). Moreover, the pair-wise differences ofthese coefficients between Model 2 and Model 1
and between Model 3 and Model 2 show statistically significant improvements in the models
goodness of fit afterthe inclusion of the hypotheses direct and interaction effects(as we
transition from Model 1 to Model 2 and from Model 2 to Model 3).Please refer to Table 4.
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Table 3 also presents values for Nagelkerke Pseudo R-Squared rates in Models 1, 2, and
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3, which compare favorably with those reported in other recentconsumer behaviorresearch (e.g.,
12
Dixon and Verma, 2013). Our Pseudo R-Squared values also increase as the analyses transition
13
from Model 1 to Model 2 and to Model 3. Moreover, based on the F-test procedures proposed by
14
Cohen (1968), we found statistically significant improvements in the Pseudo R-Squared values
15
between Model 2 and Model 1 and between Model 3 and Model 2. TheF-test results regarding
16
the difference in the Pseudo R-Squared values between Model 2 and Model 1 (F = 22.18; p
17
<0.001) suggestthat the addition of the hypotheses predictors in Model 2 makes a statistically
18
significant contribution in explaining our dependent variables variance, above and beyond the
19
contribution made by the control variables.Similarly, the F-test results pertaining to the
20
difference in the Pseudo R-Squared values between Model 3 and Model 2 (F = 10.2; p < 0.001)
21
demonstratea statistically significant improvement by the addition of the interaction effect from
22
H3 in Model 3 in explaining our dependent variables variance.Table 5 presents results from
23
these tests.Based on these results, we can conclude that the addition in Model 2 of the direct
24
effects in H1 and H2 contributes significant explanatory power over and above the control
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variables. Also, the addition in Model 3 of the interaction effect hypothesized in H3 adds
significant explanatory power over and above the terms included in both Model 1 and Model 2.
[Insert Tables 4 and 5 Here]
4.2. Predictive Validity Tests
are classified correctly. More importantly, 27.6% of the overall returns are correctly predicted.
This is substantially better than the 15% that would be predicted purely by guessing. Moreover,
the effects of our hypotheses determinantsin Model 3 provide a statistically significant
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The classification matrix for Model 3 (Table 6) shows that 89% of all our observations
improvement to our ability to predict the outcomes of our dependent variable in relation to the
11
predictive contribution provided by the control variables in Model 1. To evaluate these
12
improvements, we followed Hosmer and Lemeshows (2000) guidelines and calculated a C-
13
Statisticindexfor the Receiver Operating Characteristic (ROC) curve in Model 1 and in Model 3
14
and then statistically compared these indices.The value of each C-Statistic index corresponds to
15
the area under the ROC curve for its corresponding model (see Figure 2 for the corresponding
16
ROC curves). This valuewill range from 0 to 1 and provide a measure of each models ability to
17
discriminate between those observations that display the outcome of interest (product return) and
18
those that do not. For Model 1, we obtained a statistically significant C-Statistic value of 0.68
19
(p< 0.01), while the C-statistic value for Model 3 was 0.73 (also statistically significant with p<
20
0.01).
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Together, the values for Model 1 and Model 3 show that a total improvement of 5% in
22
predictive power can be attributed to the inclusion of our hypothesis variables in Model 3. This
23
improvement is statistically significant (at p= 0.05), as denoted by the lack of overlap between
24
the asymptotic 95% confidence interval for the C-statistic values for Model 1 (0.662, 0.702) and
25
Model 3 (0.709, 0.747). Moreover, according to the C-Statistic benchmarks put forth by Hosmer
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and Lemeshow (2000) to evaluate the predictive power of logistic regression analyses, we can
ascertain that the controls-only model (i.e., Model 1), with a C-statistic value of 0.68, is
considered to provide only a marginal level of discriminating power. However, with a C-statistic
value of 0.73, Model 3 is considered to offer good discriminating power.


4.3. Regression Results andHypotheses Validation
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As shown in Table 3, the coefficients in Model 3 show that four of the control variables
(Price Lead, New Customer, Gift, and Popularity) have statistically significant effects (p 0.10)
10
on the likelihood of products being returned. The signs of these coefficients in Model 3 are also
11
consistent with those in Models 1 and 2 as well as with our expectations.
12
an
To test H1,wemustevaluatethejoint(notthe separate) effects on the likelihood of returns

across the variables (Scarcity1, Scarcity2,, Scarcity10) that captured, individually, scarcity
14
conditions in availabilityperceived by consumers atvarious inventory levels (1,2,,or 10 units)
15
disclosed by the retailerat the time of purchase. These effects were measured in relation to the
16
likelihood of returns for orders in which consumers had no access toinformation oninventory
17
levels and, thus, could not form perceptions of scarcity conditions in availability (please refer to
18
Section 3.3).We mustevaluate theseeffects jointly because, as explained in the development of
19
H1, the scarcityheuristicin anonlinesettingmaybecomemanifest at any stock levelbelow the
20
threshold chosen by the retailer to serve as the limit at and above which inventory levelswill not
21
be shared with consumers.In our setting, the scarcity heuristicmay become manifest at any
22
inventory level (1, or 2,,or 10 units) below the threshold of 11 units set by the retailer.
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Thus, fromH1s statement,support for this hypothesis will depend on finding statistically
24
significantevidenceamongModel3s resultstorejectthenullhypothesis(H10)thatonline retailorders

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in which items are sold under perceived scarcity conditions in availability (at either 1, 2,,or 10
units of inventory) donothavea higher return likelihood than orders in which items are
soldundernon-
scarcityconditionsinavailability.Sinceeachcoefficient(B)inthearrayofScarcityvariables
(Scarcity1, Scarcity2,,Scarcity10) in Model 3measures the effect on the likelihood of
returnsbyscarcityconditionsin availabilityperceived byconsumersinrelationtothelikelihood
ofreturnsforordersinwhichSKUsaresoldundernoperceptionsofscarcityconditionsinavailability, H1
will be confirmed if H10: BScarcity1= 0 andBScarcity2,= 0andBScarcity10= 0 is rejected.
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The results in Model 3 show that the coefficients for Scarcity1through Scarcity9 have a
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positive and statistically significant (p 0.02) effect on Return. The values of these coefficients
11
are important because theysupport H1s expectation that online retail orders sold under scarcity
12
conditions in availability do have a higher return likelihood than orders in which items are sold
13
under non-scarcity conditionsinavailability. However, to fully validate H1, we must evaluate the
14
joint effect on Returnby all the variables in the Scarcity array through a test that will determine
15
whether we can reject H10. This test followedguidelines by Greene (1999), Murray (2005),
16
andLutsetal.(2011)for the evaluation of joint effectsby variable arrays, such as Scarcity1,
17
Scarcity2,, Scarcity10, in logistic regressions andother maximum likelihood estimation
18
analyses. The testevaluated whether the goodness of fit in Model 3 (based onitsChi-
19
Squaredvalue)statisticallyworsenedafterwesetBScarcity1=BScarcity2==BScarcity10=0, in accordance to
20
H10. The test results showed that Model 3s Chi-Squared value fell from 1290.58 (22 df and p<
21
0.01) to 1178.74(10 df and p< 0.01) after we set these coefficients values to zero. This
22
corresponds toa statistically significant decay in the goodness of fit in Model 3,reflected in a
23
drop of 111.84 (12 df, and p< 0.01)inModel3s Chi-Squared value. Based on this result, we can
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reject H10 and, incombination with the positive and statistically significant Scarcity coefficients
identified above,validate H1.
As theorized in H2, Model 3 shows that Reliability has a negative and statistically
significant (p<0.05) effect on Return.Moreover, because the coefficient for the interaction term
(Reliability * Timeliness Expectation) is positive and significantly different from zero (p<0.05),
Model 3 provides empirical support for the moderation effect proposed in H3 (Cohen and Cohen,
1993).Recall that in the coding for expected delivery timeliness, a lower score in fact meant a
higher apriori expectation. Thus, the positive sign of the interaction regression coefficient
actually indicates a negativemoderation effect(or attenuation) by Timeliness Expectation on the
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link between Reliability and Return, consistent with H3.Table 7 summarizes our results support
11
for H1, H2, and H3. Please note that the results in Model 3 and their support for these hypotheses
12
are consistent with those in Model 2.
13
10
Post-hoc evaluations of the coefficients in the Scarcity array show that, whilethe
15
Scarcity10coefficientwaspositive (as expected in H1), it was the only coefficient inthis array that
16
was not statistically different from zero (p=0.13). While this result does not disconfirm H1, it
17
does provide insufficient evidence to conclude that perceived scarcity conditions among
18
consumers whose orders are placed under inventory level disclosures of 10 unitsgenerate a
19
higher risk of return than that caused when information aboutstock levels is not available.
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The post-hoc analyses also revealed that, according to the Scarcity variablesmeans
21
(Table 1),orders placed under inventory level disclosures ranging from 1 to 9 units and orders
22
placed under no inventory disclosurejointly account for 95% of our observations. Thus,the
23
statistical support obtained for H1 applies to a substantially large portion (95%) of our sample.
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Further examination of the statistically significant coefficients for the array of Scarcity
dummies (Scarcity1 through Scarcity9) in Model 3 (as well as Model 2) showed that their values
have a tendency to be inversely related to the inventory amounts disclosed to consumers at the
time of purchase. As inventory levels disclosed go down (i.e., from 9 units all the way to 1 unit),
the coefficients increase. Statistical analyses comparing the coefficients fromScarcity1 through
Scarcity9in Model 3 also show that the Scarcity1 coefficient is statistically higher than each of the
coefficients for Scarcity4 through Scarcity9. As shown in Figure 3, the 95 percent asymptotic
confidence interval for the coefficient for Scarcity1does not overlap with any of the intervals for
the coefficients for Scarcity4 through Scarcity9. These results suggest that the effect on the
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likelihood of returns is statistically higher when inventory is disclosed at 1 unit at the time of
11
sale(implying a severely low inventory level) than when inventory is disclosed at 4 units or
12
higher.
These post-hoc findings complement the results in support of H1. Theyshow that online
13
10
orders in which SKUs are sold under perceived scarcity conditions in availability (specifically
15
when information shared with consumers revealsstock levels ranging from 1 to 9 units) have a
16
higher return risk than orders in which items are not sold under perceptions of scarcity conditions
17
in availability (when there is no disclosure of stock levelsto consumers). The results also show
18
that there is a statistically higher return risk when stock levels disclosedto consumers at purchase
19
comprise only1unitthanwhenthese levels are 4 units orhigher. Thus, while Scarcity and its overall
20
effect on returns is statistically higher when inventory is disclosed to consumers across different
21
inventory levels than when inventory is not shared with consumers, this effect becomes
22
statistically stronger when stock levels are disclosed at their lowest amount possible (1 unit).
23
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Regarding H3, the results in Model 3 also reveal that, since the direct effect of Reliability
on Return remained statistically different from 0 (p < 0.01) after the addition of the interaction
term in Model 3, the moderating effect by Timeliness Expectation on the ReliabilityReturn
relationship is partial.Thus,Timeliness Expectationpartially attenuates the impact
thatReliabilityhas on Return. This result gives further credence to the manifestation of the
Assimilation-Contrast model (Anderson, 1973) that we had proposed earlier, wherein service
performance needs to go up at an accelerating rate with increasing a priori expectations (Brown
et al., 2013; Bearden and Teel, 1983; Szymanski and Heard, 2000). According to our results,
customers who hold high a priori expectations regarding delivery servicesare more likely to
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engage inreturns during the coping stage, as compared to other customers, whendelivery services
11
fall short of expectations.These findings are discussed in detail in the next section.
5.Discussion of Research Findings, Contributions, Implications, and Limitations

The advent of the Internet has improved customers ability to search for and find products
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15
10
that are best suited for their needs (Brynjolfssonand Smith, 2000). But, the presence of
17
sizeableproduct return rates across different retail segments on the Webis evidence thatmany
18
limitations still exist. Research has shown that the type of return policies (Wood, 2001) and the
19
typeof products offered by retailersmay affect customers decisions to return items(Rabinovich et
20
al.,2011).The implication has been that returns constitute a necessary drawback of doing
21
business on the Web, and that retailers can lower returns only if they sell the right kind of
22
products(thosethat shoppers can easily search and evaluate online) orif they make their return
23
policies more stringent in order to dissuade customers from sending products back to them in the
24
first place (Griffis et al., 2012; Rogers et al., 2002).These approaches at lowering the incidence
25
of returns, however,do not constitute a practical option for retailers who have already committed
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to selling products outside those categories or for retailers who do not want to alienate their
customers by toughening up their return policies. The OM literature hasaddressed this issue
bydeveloping return policies that offeroptimal value to buyers and sellers (e.g.,Ketzenbergand
Zuidwijk, 2009; Su, 2009; Shulman et al., 2009)and bystudyingtheeffect on
returnsbyproductdefects, product incompatibilitywith userneeds, andflaws in product
performance(Guideetal.,2006;Fergusonet al., 206).Yet, there is a limited understanding
abouttheroleplayed bybehavioral aspects among consumers and process attributes in consumers
transactionsin returns in anonline retailsetting.
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Our study has taken a step towards addressing this shortcomingin the literature
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byconsidering process attributes in PDSprovided by Internet retailers as part of their transactions
11
with consumers. In so doing, it identifies how retailers can reduce the likelihood of product
12
returns based on the perceptions that they instill among consumers aboutproduct availability and
13
based on the actual performance in their execution of delivery in PDS (i.e., timeliness
14
expectation and reliability) all of which are key elements of the online retail transaction.
te
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Our first hypothesis proposed a positive relationship between scarcity conditions in
16
availability at the time of purchase and the likelihood of product returns. Our results offer
17
support for this hypothesis. Thus, items that are purchased under conditions of perceived scarcity
18
are more likely to be returned than those that are purchased devoid of such conditions. This
19
finding has key implications for online retailers. Rabinovich et al, (2011) argue that large virtual
20
shelf spaces available in online retailing sites give sellers the flexibility to stocklarge assortments
21
of products. This often gives rise to situations where retailers maintain broad productassortments
22
but limited depth of on-hand inventory, thereby creating slim stock levels for products available
23
for sale. In those cases, the prevalence of reduced levels of inventory (when disclosed), along
24
with the scarcity heuristic, are likely to induce customers to hurry and buy products to avoid
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missing out in case of stockouts. However, according to our results, products that are bought
under these conditions are also increasingly likely to be returned. Thus, while retailers may
indeed succeed in generatingsales bypromoting scarcity perceptions among consumers (Gierl et
al., 2008), our results suggest that many such sales will not stick and products will be returned at
a higher rate than they would have been, had such an approach not been adopted in the first
place. This studyalsoextends research in traditional retail settings that has found that,when
people buy impulsively, theyareless likely to be happy with their purchases(Gardner and Rook,
1988). Thus, online retailers must consider carefully the value of operational approaches that use
such manipulations of inventory scarcity conditions to move goods.
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Another finding relates to the communication of product scarcity to potential shoppers.

According to our post-hocanalysis, return risks increase significantly when information is
12
disclosed to consumers to show that there is a minimal inventory amount (1 unit) available for
13
sale. Traditional retailers have long opted to use this scarcity manipulation to influence consumer
14
purchase choice, thus utilizing the scarcity heuristic to their advantage (Parker and Lehmann,
15
2011; van Nierop et al., 2008). For example, the clothing retailer American Apparelhasrecently
16
tested displays of one item per SKU in its shelves in an attempt to create impressions of scarcity
17
among consumers (Swedberg, 2012). Indeed, even in the online space, we often see the
18
implementation of this strategy. Some retailers disclose information about product availability
19
when stock levels are low (and even add statements like Hurry, only 1 item remaining!). While
20
such approaches may have some success in generating sales (Parker and Lehmann, 2011), our
21
results indicate that these strategies may also have strong effects on the risk of product returns.
22
Thus, these strategies must be carefully scrutinized by online retailerssoastonot share inventory
23
availability to consumers in a way that will generate a large amount of returns in relation to the
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sales added by consumers scarcity perceptions.Themostprominentcaseof this scarcity effect on
returns, of course,isseenunderextremely low inventory levels (i.e., only 1 item) where return
likelihoodwill be greater than at higher levels of inventory disclosed.

In addition to the scarcity effect, consumers assessment of deliveryservicesin their
ip
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transactions with Internet retailers depends on experiential qualities that willonlybe evident to
consumers when theyreceive their orders. As aresult, the performance in the execution of these
deliveries ought to have a stronginfluence on the likelihood of product returns on theInternet.
Ourpaper confirms this influenceempirically: oursecond hypothesis proposed that delivery
reliability-measuredasthe extent to which ordersaredeliveredahead of (or laterthan) promised
10
deliverytimesis related to product returns. Statistically significant evidencewas obtained in
11
support of this hypothesis. Thus, thereisevidenceto suggest thatdeliveryreliabilitydoes,in fact,
12
mitigate the risk ofproduct returns.
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This findingadds another dimension to the stream of literature that demonstrates the role
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of order fulfillment and operations in the success of online retailers. It has been argued that the
15
two key encounter-specific dimensions of online retailing that drive customer satisfaction and
16
retention are product performance and order fulfillment performance (Reichheld and Schefter,
17
2000). For online retailers, product performance often depends on their suppliers quality of
18
manufacturing, while order fulfillment performance often depends on the operational excellence
19
of third party logistics providers.
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20
This is an important finding - research has demonstrated that order delivery reliability in
21
online retailing is a strong indicator of repeat purchase intentions (Boyer and Hult, 2005; Boyer
22
and Hult, 2006), and referral behavior (Griffis et al., 2012-b). In addition, it has been shown that
23
unreliable order delivery decreases customer loyalty (Rao et al., 2011). While those earlier
24
findings have value, it has also been suggested that in an online environment, customers usually
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have low levels of loyalty to a particular retailer to start with (Kuttner, 1998; Brynjolfsson and
Smith, 2000) and thatloyalty among online shoppers is not something that retailers should rely
upon. Thus, in addition to measuring the follow-on impacts of order delivery reliability through
customer loyalty, we propose that it would be meaningful to measure its immediate impacts. Our
results indicate that the effects of order delivery reliability directly relate to the likelihood of
closing current sales, never mind generating subsequent sales.
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Our third hypothesis proposedthe existence of a moderationeffectbyaprioriexpectations of
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order delivery timeliness on the linkbetween actual orderdeliveryreliability and thelikelihood of
product returns. Our results suggest that the effect that reliabilityin thedeliveryofordershasin
an
decreasing the likelihood of returns is stronger for orders thatinvolveexpectations offastdelivery
11
thanfororders withlessexpeditiousdeliveryexpectations.Put differently, althoughtheoccurrence of
12
returns is a result of delays in the delivery of orders relative to the initial promises made by the
13
retailers, this effect is more notable for orders that involve short a priori delivery promises.
te
It is important to note that, in testing our hypotheses, we controlled for effects on the
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10
15
likelihood of product returns originating from failures exogenous to PDS as well as several
16
characteristics regarding the products and customers involved in the transactions between
17
customers and Internet retailers. Our results show significant effects by product and customer
18
characteristics on the likelihood of product returns. Regarding product characteristics, we found
19
that product popularity increases the likelihood of returns. However, this likelihood is lower
20
when products are sold at prices below competition. Regarding customer characteristics, we
21
found that the likelihood of product returns is higher for transactions in which customers have
22
previously established relationships with an Internet retailer than in transactions in which brand
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new customers are involved. On the other hand, this likelihood is lower for transactions in which
customers are gift receivers than in transactions in which no gift receivers are involved.
It is alsoimportant to note that several coefficients for other control variables turned out
to be not significantly different from zero in our regression analysis. Two of these coefficients
correspond to those for Misinformation (B = 33.14, p>0.99), and Damage (B = 33.39, p>0.99).
These coefficients stand in contrast to the high correlation coefficients that we observed between
these same variables and Returns. A reason why the regression coefficients are not significantly
different from zero is that the number of returns causedbyMisinformation or Damage is
relatively small (a total of only 289 out of 6,732 total observations). These numbers are not
10
surprising: according to the 2012 ComScore Online shopping survey, issues associated with
11
Misinformation or Damage were not even among the top 10 concerns that customers had with
12
online shopping. Unfortunately, a downside of having a small number of observations for these
13
variables is that statistical significance is hard to obtain for their effects on returns in the results,
14
after controlling for all other determinants of returns that have a much greater incidence.
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In addition, we found that the regression coefficient for S&His not statistically significant
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16
(B = 0.004, p=0.30). We contend that this is because S&H feesin our data set are rather small
17
compared to the price of the product (the average S&H fees are less than 2% of the average
18
purchase price of the product). Thus these fees by themselves may not be enough to deter
19
customers from returning their products. It is likely that in data sets where S&H fees are a higher
20
percent of product price, they may still act as a deterrent against returns.
21
Finally, we found noevidenceto suggestthat holiday purchases were more likely to be
22
returned than purchases placed during other times during the year. This result differs from that in
23
aprior studyby Petersen and Kumar(2009).We contend that this discrepancy is due to differences
24
between the data set in our study and the data in the study by Petersen and Kumar (2009).
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Petersen and Kumar (2009) obtained data from a catalog retailer and had several different
product categories in their sample. Based on this, they contended that the increased holiday
returns were because customers were buying products in new/different categories during the
holiday season, than they did during other times of the year. Given that our data set involved
only one product category, we are not able to isolate this effect, which may explain why, in our
study, we did not obtain a statistically significant effect (B= -0.03, p= 0.75) for this variable.
7
8
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5.1. Literature Contributions
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Our study is positioned at the intersection among the SCM,OM, andMarketing literatures.
In the past, research at this intersectionhas considered pre-purchasing events to highlight how
11
Internet use by consumers yields lower search costs that allow them to find better suited products
12
and lower prices (Brynjolfsson and Smith, 2000). We expanded on these phenomena by going
13
past the initial pre-purchasing events to include returns. As a result, we can better explain why,
14
despite the existence of lower search costs (and most likely better search results) on the Internet,
15
consumers are still compelled to send back products purchased online.
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This study also underscores the synergies accrued when OMand Marketing functions are
17
well integrated and the problems encountered when they are not. Researchers have long asserted
18
the value of linking business processes across functionsto achieve world-class supply chain
19
performance (Sawhney and Piper, 2002; Malhotra and Sharma, 2002; Hausman et al., 2002). Yet
20
few empirical studies have investigated the impact of one function on the other. As we have
21
shown, the OMfunction should not be viewed merely as a cost center, but rather as a center of
22
revenue creation with direct influence in the marketing function. This is critical in online
23
retailing, where competition is intense and firms are subject to a great deal of pressure to find
24
ways to raise revenues through innovative operations (Laseter and Rabinovich, 2011).
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Forinstance, our study demonstrates thatpoorly performingOM practices (by way of
decreased order delivery reliability) can be problematicformarketing. While prior research has
shown that delivery glitches can curtail lifetime customer value for a retailer (Rao et al., 2011),
our study shows that these failures can decrease immediate value as well by increasingreturn
rates.
Moreover, ourfindings offer two extensions to Lazarus (1991) original theory of
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exchange assessment. First, ourfindingsdemonstratethat elements within the appraisal and
response stagescan directly impact each other in addition to the outcomes in the coping stage.
This extends the work by Gotlieb et al. (1994) who first proposed that the appraisal of an
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exchange may involve a sequence of evaluations. Second,our researchgoes beyond Lazarus
11
(1991) original focus on customers coping responsestoconsider the formation of customers
12
behavioral intentionsand demonstratesthat emotional responses to an exchange (coping) can
13
directlytrigger changes in actual behavior (product returns). In so doing, our studyoffers
14
advancements beyond theoriginal conceptualizations and subsequent empirical evaluations in
15
retailing and electronic commerce (e.g., Cronin et al. 2000; Griffis et al, 2012).
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Finally, we have extended the prior literature by incorporating principles from the
17
Assimilation-Contrast Theory and the ECT into the PDS evaluation framework in the context of
18
the exchange assessment (Lazarus, 1991) to show that customer expectations of order delivery
19
timeliness moderate negatively the effect by actual order delivery reliability on product returns.
20
While researchers have assumed that delivery reliability has a uniform impact on customer
21
satisfaction (Boyer and Hult, 2005 and 2006; Griffis et al., 2012), we find that, when product
22
returns are considered, this effect actuallydependson the initial delivery timeliness expectations
23
signaled to buyers:as the levels of these expectations increase, the delivery reliability provided to
24
customers should improve at a greater rate to prevent the return ofpreviouslypurchased items.
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1
2
3
5.2. Managerial Contributions
products will get returned. This is a key issue for managers - there is growing consensus in the
industry thatretailers need to do a better job in managing product returns if they are to ensure
profitable growth. According to a study, nearly 63 % of shoppers payattention to online retailers
return policieswhen making purchasing decisions (ComScore, 2012). As such then, returns are a
major issue for online retailers, with many managers just accepting them as a cost of business.
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Our results offer retailers practical insightsto managePDSand curb thelikelihood that their
Yet, as we have demonstrated, there are simple actions that retailers can take, to prevent
returns. These include a careful assessment of the wisdom of revealing inventory level
11
information to consumers prior to purchase, especially when stocks are running at their lowest.
12
While the disclosure of low inventory levels may be attractive from the traditional viewpoint
13
held in the OM literature regarding the benefits of accelerating inventory turns by playing on
14
scarcity fears among customers, it is a double edged sword that can also contribute to create
15
unnecessary product returns. This is because these scarcity perceptions can artificially inflate the
16
value of products in the eyes of customers to significantly exceed the actual value that customers
17
will attain once they have bought and received theseproducts.
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Our finding that the disclosure of inventory levels can contribute to generate scarcity
19
perceptions among customers and that these perceptions influencestronglythe risk of returns
20
should also serve as a motivation to deemphasize the use of centralized product recovery
21
networks in favor of decentralized systems. While centralized networks are highly cost-effective
22
in supporting the inspection and refurbishment of defective items, they do not offer the means to
23
rapidly capture returnscaused byscarcityperceptions, in which products present no flaws (Guide
24
et al. 2006). Retailers thatrely on the disclosure of stock level information to promote perceptions
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of scarcity among consumersmay,therefore, benefit from having access to decentralized
networks, provided commonly by thirdpartyproviders,torapidlyprocessthistypeoffalsereturns.

It is alsoimportant to note that wearenot proposingthat the disclosureofstock levels should
always be avoided. Whilesuchdisclosure can increasereturns, itis conceivablethatit mayalso
increasedemandforsome productsto amuch greater extent. Moreover,thedisclosure
ofinventorylevelsis somethingthatretailers couldembrace if profitmargins from products arehigh
enough tooffsetreturn costs.In addition, thedisclosureof stocklevels can be important for customer
service, particularly in cases involving products that are sold in multiple
units(suchashomeimprovement supplies) andfor which customers wouldwant to see available on-
10
hand inventories beforemakingtheirpurchases2. Thus, in addition totheir potential to boost sales,
11
the disclosureof inventorylevelsmaybeworthwhile, even in the faceof increases in returns, if
12
theprofit marginsforthe products involved arehighenough to absorb the cost ofthe added returns
13
or if customer servicemakes itnecessaryto sharesuchinformation with shoppers.
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Our results alsodemonstrate that an increasingly reliable delivery, in accordance with
14
evermore demanding customer expectations, is critical in preventing incidents of productreturns.
16
There are several actions that online retailers can take to address this issue.For example, research
17
has revealed that one of the reasons for fulfillmentfailures among retailers is that there is often a
18
mismatch between the retailers actual inventory levels on hand and the inventory level data
19
onrecord (Fleisch and Telkamp, 2005; Delen et al., 2007). Indeed, factors such as product theft,
20
deterioration, and misplacement have the potential to create a mismatch between the stock-
21
leveldatathat a retailer has on-recordversusnumber of units onhand. This mismatchcan
22
underminereliability in order fulfillment. This problem becomes even more acute when on-hand
23
inventory levels are low to start with. In this case, if a retailer promises a customer a particular
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We thank a reviewer for suggesting this case
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level of delivery timeliness, and fails to deliver owingto amismatch between on-handand on-
recordinventory, delivery reliability will be affected. This, as we have demonstrated, has a
potential to lead to returns. Similarly, given the effect of expected delivery timeliness and
reliability on returns, our findings also highlight the importance of efficient interfacing between
the online retailer and third party logistics providers in charge of last-mile delivery. This further
demonstrates the value of efficient linkage of business functions across companies (Hausman et
al., 2002; Malhotra and Sharma, 2002).
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Our results also point to hidden drawbacksinvolved in efforts by Internet retailers to

enhancethe value of their services in the eyes of consumers. Since most online retailers have
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been facing increasingly smaller poolsof available first-time customers, a number of them have
11
shifted their efforts to capturea higher share-of-wallet from existing customers byupgrading,atno
12
charge,the PDS that they offer. A stronger attempt is thus being made to snag a higher financial
13
commitment from customers during the appraisal stage of the appraisal response coping
14
cycle itself. Our results should givethese retailers pause: theymust ensure that they are prepared
15
to back up their free upgrades with processes that are free of glitches to avoid poor service
16
experiencesthat could easily result in product returns during the coping phase.
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Finally, according to our results, PDS and pricing competencies should be tied in with an
18
appreciation for the various types of customers that retailers serve in order to improve
19
theirmanagement of product returns. We find, in particular, that new customers and customers
20
who receive gifts are less likely to engage in product returns relative to other customers.
21
Different risks of returns according to the type of customers involved in the transactions elevate
22
the need to tailor retailers PDS and prices in favor of those customers who have had long
23
relationships with the retailers and who are engaged in the purchase of products exclusively for
24
themselves.
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5.3. Limitations and Future Research Opportunities

As with all empirical studies, ours presents several limitations thatmay offer avenues for
future research. First, our studyfocused exclusively on returns, which may be seen as an extreme
case of customer dissatisfaction. Yet, it is possible that some customers may be highly
dissatisfied with their products but choose to not actually return them. Therefore, it is possible,
for example, that the effects ofPDS attributes on returns in our studymay have underestimated
the extent of dissatisfaction among customers. Future research may examine this issue.
cr
us
Our study also focused on a single retailer in order to control for potential biases in the
occurrence of product returns brought about by different return policies. As we explained earlier,
an
ip
t
this retailer had in place a fairly restrictive return policy, relative to those found among other
11
retailers. The stringency of our retailers policy could havecurtailed the incidence of returns
12
linked to PDS, making the testing of our hypotheses exceedingly demanding. Future work may
13
consider testing our hypotheses with the support of retailers that have more liberal return policies
14
in order to ascertain thesignificanceof our results in a setting inwhich returnsare morecommon.
15
Specifically, under this new setting, theeffect inH1 maytakeon agreaterstatisticalsignificance
16
dueto the easein whichcustomers maybe ableto return items boughtafterexperiencing conditions
17
of perceived scarcityin availabilityat the appraisal stage oftheir purchases.
te
Ac
ce
p
18
10
Future research may also extend our work by considering a wider range of products. Our
19
focus on only one type of products (personal accessories) enabled us to control for spurious
20
effects on returns caused by different product classifications. Typically, for personal accessories,
21
returns are driven by the pricing, quality, and overall look and feel of the products, all of which
22
are important in the appraisalstageoftheexchange framework,justas much as thePDS issues at the
23
core of our model. Thus, we contend that our setting provided for more robust tests of our
24
hypotheses than other settings in which returnsare not dependent on as manydeterminants. And
45
Page 45 of 62
while this contributes tothe validity of our results, the study of other settings could add further
insights by showing how the involvement of different product categories can strengthen our
results. We anticipate, for instance, that the effects in our empirical model will be stronger in
online retail settings where groceriesare involved because, in the minds of consumers, PDS is a
much more significant quality factor for these product transactions on the Internet than it is for
fashion intensive products such as ours.Moreover, theeffects ofscarcityconditionsinavailability
on the likelihood of returns for theonline grocery industry may differ from those in our study due
to the distinct patterns that exist among shoppers and SKUs in online grocery retailing.
us
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6. Conclusion
12
business modelthat has gained a significant amount of attention over the past several years.
13
Nevertheless, several problems have continued to challenge managers in this industry product
14
returns being one of them. Many online retailers now compete not only with other web-based
15
counterparts, but also with traditional retailers, who are usually in a better position to control,
16
manage, and process returns. Because of this, and the fact that online retailing usually involves
17
remote purchase environments where customers do not have the opportunity to examine the
18
products they buy, online retailers are usually exposed to higher return rates than traditional
19
retailers. This has been recognized as an issue by several managers, who often view it as
20
something that they simply cannot control. The prevailing belief among managers has been that
21
returns are an inevitable part of the nature of the online retail environment itself.
22
an
9
10
11
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Online retailing offers a unique way of getting products to end customers, and is a
While there may be some truth to that, as our study has demonstrated, there are at least
23
some aspects of the online purchasing process that managers can in fact address, and which will
24
at least have some effect on returns. As we have shown, a purposeful management of the PDS
25
process, including availability, expected delivery timeliness, and reliability, can contribute to
46
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control the occurrence of returns. This is important because managers can effectively track PDS
activities through the use of objective measurements, which, as we demonstrate, should impact
the extent of returns that they receive.
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5
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49
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1
2
Figure 1: Theoretical Model

3
Stages in the Online Retail Exchange

Response Stage
Coping Stage
H2: (-)
Order Delivery
Reliability
ip
t
H1: (+)
Product Return
Likelihood
us
H3 (+):
(Attenuation)
an
Expected Order
Delivery Timeliness
Figure 2: ROC Curves for the 3 Models
7
8
9
Ac
ce
p
te
10
11
4
5
Scarcity Condition in
Availability
cr
Appraisal Stage
12
56
Page 56 of 62
Figure 3: Post-Hoc Statistical Comparison of Confidence Intervals for Scarcity Variable Coefficients
1.990
1.568
1.570
cr
1.500
1.177
an
0.504
0.913
0.758
0.614
0.500
1.047
0.949
0.000
4
5
6
Scarcity 2
Scarcity 3
Scarcity 4
Scarcity 5
0.231
Scarcity 6
Scarcity 7
0.119
Scarcity 8
0.064
Scarcity 9
Ac
ce
p
Scarcity 1
te
0.309
0.131
95% Confidence Interval for Scarcity

through Scarcity 9Coefficients
0.997
1.000
us
1.245
0.524
95% Confidence Interval

for Scarcity 1 Coefficient
2.000
ip
t
2
3
57
Page 57 of 62
1
2TTable 1: Operationalization of Variables and Descriptive Statistics
Std.
Dev.
Return
0.15
0.35
Scarcity1
0.02
0.15
Scarcity2
0.02
0.12
Scarcity3
0.02
0.13
Scarcity4
0.04
0.20
Scarcity5
0.05
0.21
Scarcity6
0.04
0.20
Scarcity7
0.02
0.15
Scarcity8
0.04
0.18
Scarcity9
0.05
0.21
Scarcity10
0.05
0.23
Scarcity11
0.65
0.48
Continuous
(Percentage)
Reliability
0.01
0.43
Continuous
(Number of days promised
for delivery)
Timeliness
Expectation
4.27
2.59
Binary Dummy
(1=Yes, 0 = No)
Misinformation
0.04
0.19
Binary Dummy
(1=Yes, 0 = No)
Damage
0.003
0.06
Binary Dummy
(0=Yes, 1 = No)
Price Lead
0.18
0.39
Continuous
Price
644.13
1334.1
The orders S&H fees

Did the customer name and address exist
in the database prior to the customer order
in the studys dataset?
Did the billing name and address match
the shipping name and address?
Was the purchase made in the holiday
season (November / December)?
Continuous
S&H
12.83
12.55
New Customer
0.15
0.36
Gift
0.16
0.37
Holiday
0.43
0.5
Ln of annual product sales
Continuous
Popularity
16.71
21.86
Scarcity conditions are communicated to

customers depending on whether there
were 10 or less units in stock for a
product when customers placed their
orders
Flawed Product
Description
Damaged /
Broken Goods
Product Price
Leadership
Product Price
S&H Price
Purchase History
Gifting
Seasonality
Product
Popularity
te
Expected Order
Delivery
Timeliness
The extent to which the order was

delivered earlier than promised (measured
in percentage terms)
The promised order delivery speed (based
on the delivery commitment provided
during purchase)
Was the product information provided
prior to purchase, deemed to be incorrect
by the customer?
Was the product deemed to be broken or
defective by the customer upon delivery?
Was the item available for a lower price
on the purchase date at a competing
retailer?
Price paid for the product at the time of
purchase.
Ac
ce
p
Order Delivery
Reliability
ip
t
Binary Dummy
(1=Yes, 0 = No)
11 Binary Dummies
One variable, Scarcity11,
identifies whether customers
had access to stock level
information at the time of
purchase (0=Yes, 1 =
No).Scarcity11 was the
baseline in the regression
analyses.The other 10
variables (Scarcity1,
Scarcity2,, Scarcity10)
identify the available
inventory level disclosed at
the time of purchase. For
example, if 7 units are
revealed to be in stock,
Scarcity7= 1 and the other
variables will equal 0
cr
Whether the product was returned (1) or

not (0)
Scarcity
Condition in
Availability
Mean
Operationalization
us
Product Return
Label
Description of Operationalization
an
Name
Binary Dummy
(0=Yes, 1 = No)
Binary Dummy
(0=Yes, 1 = No)
Binary Dummy
(1=Yes, 0 = No)
58
Page 58 of 62
ip
t
Holiday
Popularity
M
an
ce
pt
ed
Gift
.01
-.04
-.03
-.03
-.05
-.05
-.05
-.04
-.04
-.06
1
New
Customer
Scarcity10
.01
-.04
-.03
-.03
-.05
-.05
-.05
-.04
-.04
1
S&H
Scarcity9
.03
-.03
-.03
-.03
-.04
-.04
-.04
-.03
1
Price
Scarcity8
.02
-.02
-.02
-.02
-.03
-.03
-.03
1
Price Lead
Scarcity7
.03
-.03
-.03
-.03
-.04
-.05
1
Damage
Scarcity6
.04
-.03
-.03
-.03
-.05
1
Misinformati
on
Scarcity5
.05
-.03
-.03
-.03
1
cr
Scarcity4
.05
-0.02
-.02
1
Timeliness
Expectation
Scarcity3
.05
-.02
1
Reliability
Scarcity2
.10
1
-.04
-.01
-.03
-.03
.00
.00
-.01
.00
.02
.01
.00
1
-.01
.01
-.02
-.03
-.02
-.01
-.01
-.01
.02
.03
-.01
.62
.47
.05
.04
.04
-.03
.04
.01
.00
.03
.00
.02
-.03
.14
.01
-.01
.01
-.01
-.01
.00
.00
-.01
.00
-.02
.00
-.02
.00
.00
-.01
.02
-.01
.00
.00
.01
.00
-02
-.01
.00
.00
.01
.00
.00
.00
.01
.00
.00
-.01
.04
-.17
.02
.00
.01
.00
.01
.00
.00
.00
.01
-.01
.00
-.31
-.06
.00
.00
.00
.03
.03
-.03
.00
-.01
-.02
.01
-.01
-.04
.00
.00
.02
-.02
.01
-.02
.00
.03
-.01
.00
-.05
.00
.00
.02
.00
.03
.00
-.01
.02
.02
-.01
.00
-.01
.02
-.05
-.03
-.04
-.06
-.06
-.03
.02
.05
.06
.02
.06
-.01
-.01
.00
-.23
-.43
.00
-.08
.00
.12
-.01
1
-.01
-.01
1
.01
-.01
-.03
1
.01
.02
.00
.11
1
-.02
.00
-.01
.01
.01
1
-.03
.00
-.01
.04
.04
.01
1
-.01
.02
.00
.01
-.01
.00
.00
1
.00
.00
-.01
-.16
-.05
.00
-.02
.00
1
us
Scarcity1
Ac
Return
Scarcity1
Scarcity2
Scarcity3
Scarcity4
Scarcity5
Scarcity6
Scarcity7
Scarcity8
Scarcity9
Scarcity10
Reliability
Timeliness
Expectation
Misinformation
Damage
Price Lead
Price
S&H
New Customer
Gift
Holiday
Popularity
Return
Table 2: Correlation Coefficientsa
Bold indicates p < 0.05
60
Page 59 of 62
ip
t
Table 3: Regression Resultsa
2
Variables
Ac
ce
pt
Controls
Nagelkerke
Model 2
Model 3
(Direct Effects)
(Direct+Interaction Effects)
Variance
Inflation
Factor
B (Std. Err)
B (Std. Err)
B (Std. Err)
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
23.23 (2493.69)
23.25 (8350.68)
0.99
0.99
1.62 (0.19)
1.05 (0.26)
1.09 (0.24)
0.84 (0.17)
0.65 (0.18)
0.59 (0.18)
0.59 (0.23)
0.51 (0.20)
0.41 (0.18)
0.26 (0.17)
-0.25 (0.11)
0.03 (0.02)
NA
23.15 (2454.24)
23.38 (8258.32)
<0.01
<0.01
<0.01
<0.01
<0.01
<0.01
0.01
0.01
0.01
0.13
0.02
0.11
0.99
0.99
1.61 (0.19)
1.05 (0.27)
1.09 (0.24)
0.84 (0.17)
0.65 (0.18)
0.58 (0.18)
0.59 (0.23)
0.51 (0.20)
0.41 (0.18)
0.26 (0.17)
-0.49 (0.17)
-0.00 (0.03)
0.14 (0.07)
23.15 (2454.67)
23.39 (8258.23)
<0.01
<0.01
<0.01
<0.01
<0.01
<0.01
0.01
0.01
0.02
0.12
<0.01
0.91
0.05
0.99
0.99
1.02
1.01
1.01
1.03
1.03
1.02
1.01
1.02
1.03
1.03
4.11
3.45
7.06
1.01
1.00
0.07
0.64
0.30
<0.01
<0.01
0.75
<0.01
<0.01
1.00
1.08
1.29
1.00
1.01
1.00
1.05
M
an
ed
Hypothesized
us
(Control Only)
Scarcity1
Scarcity2
Scarcity3
Scarcity4
Scarcity5
Scarcity6
Scarcity7
Scarcity8
Scarcity9
Scarcity10
Reliability
Timeliness Expectation
Reliability*Timeliness Expectation
Misinformation
Damage
Price Lead
Price
S&H
New Customer
Gift
Holiday
Popularity
Constant
- 2 Log Likelihood
Chi-Squared
Overall Significance
D.F. (p-value)
Predictive Power
C-Statistic (p-value)
Variance Explained Pseudo R- Cox and Snell
Squared Values
cr
Parameter Estimates
Model 1
-0.18 (0.11)
1.18E-5 (2.81E-5)
0.00 (0.00)
-0.42 (0.10)
-0.36 (0.12)
-0.00 (0.08)
0.05 (0.03)
-1.78 (0.13)
4565.64
1167.87
9 (<0.01)
0.08
0.68
0.11
<0.01
<0.01
>0.99
0.10
<0.01
-0.19 (0.10)
1.47E-5 (2.84E-5)
0.00 (0.00)
-0.46 (0.10)
-0.38 (0.12)
-0.03 (0.08)
0.09 (0.03)
-2.25 (0.17)
4464.46
1287.04
21 (<0.01)
0.08
0.6
0.14
<0.01
<0.01
0.75
<0.01
<0.01
-0.19 (0.10)
1.3E-05 (2.9E-05)
0.00 (0.00)
-0.46 (0.10)
-0.38 (0.12)
-0.03 (0.08)
0.09 (0.03)
-2.16 (0.18)
4442.91
1290.58
22 (<0.01)
0.682 (<0.01)
0.727 (<0.01)
0.728 (<0.01)
0.159
0.174
0.174
0.276
0.304
0.305
The sign for the Timeliness Expectation coefficient changes from 0.03 in Model 2 to -0.003 in Model 3. However, this change does not hinder H3s validation becauseit is not a
caused by multi-collinearity in Model 3 (as evidenced by the fact that all VIF values in this model are below 10). Moreover, the Timeliness Expectation coefficients across both
models are not statistically different from each other (at p< 0.05), as shown by the coefficients highly overlapping 0.95 confidence intervals: (-0.01, 0.07) in Model 2and (-0.06, 0.05)
in Model 3. Furthermore, both coefficients are not statistically different from zero, making it impossible to ascertain with statistical confidence what their signs actually are. For these
reasons, it would be inappropriate to infer that the coefficient for Timeliness Expectation in Model 2 is positive and different from the Timeliness Expectation coefficient in Model 3
and that the product between the Timeliness Expectation coefficient and the coefficient for Reliability in Model 2 will be negative (contrary to our expectation in H3).
61
Page 60 of 62
Table 4: 2 Difference Testsbetween Model 2 and Model 1 and Model 3 and Model 2
Model 2
(Direct Effects)
4446.46
1287.04
21 (<0.01)
Model 1
Measures of Relative
Goodness of Fit
Model 3 vs. Model 2
4446.46 - 4565.64 = -119.18

1287.04 - 1167.87 = 119.17a
12
4442.91 4446.46 = -3.55
1290.58 12874.04 = 3.54b
8
9
10
11
12
13
14
15
Comparing Model 2 with 1
Model 2
0.304
0.0276 a
22.18a
12a
6710a
<0.001a
Model 3
0.305
0.0010 b
10.2 b
1b
6709 b
0.001b
Comparing Model 3 with 2
Table 6: Classification Matrix for Model 3a
Ac
ce
p
te
an
3a This difference exceeds the critical Chi-squared value for 12 DF (21.02) at p=0.05
4bThis difference exceeds the critical Chi-squared value for 1 DF (3.53) at p=0.06
5
6
Table 5: R-Squared Change F Tests
7
Model 1
0.276
Nagelkerke Pseudo R- Squared Value
Change in Nagelkerke Pseudo R- Squared Value
F
df1
df2
p
ip
t
Measures of Relative
Goodness of Fit
Model 2 vs. Model 1
4565.64
1167.87
9 (<0.01)
-2 Log Likelihood
Chi-Squared Value
DF (p value)
-2 Log Likelihood Model 2
Chi-Squared Model 2
Chi-Squared Model 1
dfModel 2 dfModel 1
Chi-Squared Model 3
Chi-Squared Model 2
dfModel 3 dfModel 2
us
Measures of Overall
Significance
Model 3
(Direct+Interaction)
4442.91
1290.58
22 (<0.01)
cr
1
2
Observed
Not Returned
Returned
Overall Percentage
Not Returned
5708
740
Predicted
Returned
Percentage Correct
2
100 %
282
27.6 %
a
89 %
aFollowing
the Associate Editors recommendation, we compared the full model's (i.e., Model 3) overall percentage
(i.e., 89% in this case) to the chance percentage (i.e., 50% given the binary data) plus 25%. Comparing that chance
percentage plus 25% (i.e., 75%) to the current Model 3's reported 89%, suggests that the full model is more than
capable of discriminating between returned and not returned items.
62
Page 61 of 62
Table 7: Summarized Hypotheses Tests
H1
Hypothesis
Online retail orders in which items are sold under perceived scarcity conditions in
availability have a higher return likelihood than orders in which items are sold under
non-scarcity conditions in availability
Support
Supported
H2
Delivery reliability for an online retail order is negatively related to its return likelihood
Supported
H3
Customer expectation of order delivery timeliness moderates negatively(attenuates) the

relation between delivery reliability and return rates
Supported
ip
t
1
2
3
Ac
ce
p
te
an
us
cr
63
Page 62 of 62

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Title: The Role Ofphysical Distributionservicesas

THE ROLE OFPHYSICAL DISTRIBUTIONSERVICESAS DETERMINANTS OF

Elliot Rabinovich, Ph.D.

Dheeraj Raju, PhD

THE ROLEOF PHYSICALDISTRIBUTIONSERVICESASDETERMINANTSOF

susceptible to returns, relative to traditional retail transactions.

Chain Management (SCM), and Marketing literaturesthat there is a lack of theory-driven

research on returns,as a whole (Mollenkopf et al. 2011),and in online retailing contexts,in

Please refer to:

However,given that scholars have recognized that customer predispositions and

behaviors(including returns)are shaped by a combination of market policies, product

attributes,and process (encounter-related) attributes (Humphreys and Williams, 1996), it would

in the literature as discussed earlier, process attributes have remained relatively

unexplored.These process attributes encompass the entirespan of purchase transactions on

theInternet starting at pre-salesbuyer-seller interactions and ending atpost-sales exchanges

2003; Heim and Field, 2007).

quality in the delivery of orders to customers and perceptions of customer satisfaction to

Identifying such process attributes effects on the occurrence of product returns is an

fourth section. Finally, the fifthsection presents a detailed a discussion of the

2. Literature Review and Theoretical Background

ourliteraturereview focuseson this direction.

As far as customer return decisionson or off the Internetareconcerned, two key

for customers in remote purchase situations. From a manufacturers standpoint, Padmanabhan

2009; Su, 2009; Shulman et al.,2009; 2011).

returns) is shaped by a combination of product attributes and process (transaction-related)

relative to customer expectations (Guide etal. 2006;Ferguson et al.2006). Researchon returns in

consumers (Rabinovich et al.,2011). In addition, among the process attributesof thetransactions,

an extremelyimportant part of onlineretailsales sinceit is what completes the retailtransaction and

significantly relatedtoconsumers decisions about returns. The remainder of this

sectionaddresses this issue by building a theoretical model of product return antecedents in

2.1. Conceptual Framework

When assessing the outcomes of a transaction, customers go through an evaluation

customers assessments of excellence of the products or services that are to be provided by

to deliver a pleasurable amount of consumption-related fulfillment. Based on this definition,

Taken together, thesethreestagesform the foundation for thedevelopment of our

hypotheses. Based on thesehypotheses, wewillexaminethe role played by PDS process attributes

PDS involveprocessesaimed at ensuring that customers receive their orders in an accurate

Bailey, 2004).Forour hypotheses,wefirstconsidercustomer perceptions of inventoryavailability

InventoryAvailability. In traditional retail settings, customers perceptions of inventory

confound their assessment of products true availability and stock-out risks.

Moreover, customers sole reliance on textualdescriptions about products in-stock

appraisal of Internet retailer offers.The scarcity heuristic can be understood as a manifestation of

quantity limits(e.g., maximum 2 items per customer) (Inman et al., 1997).

We propose that, in an online environment, the scarcity heuristic will

theyreceived.Thus the development ofa complete measure of satisfaction based on the

willonlybeable tofullyand objectively assess theirpurchases upon deliverywhich is decoupled

communicatedby original perceptions of scarcityin online offers stands to besubstantially

scarcity).One outcome to such adecreased assessmentof the value proposition of

productspurchased under perceived scarcity conditions would be an increase in the likelihood of

conditions. This leads to our firsthypothesis.

SERVQUAL literature, wherein reliability is understood as the ability to perform promised

reliability is at least partially controlled by logistics providers).As aresult, it is notobvious

ourknowledge,this issue has not been addressed in theliterature.

overall perceived service satisfaction. Similar to the SERVQUAL literature (e.g.,Parasuraman et

received (Susarla et al., 2003; Venkatesh and Goyal, 2010).

ECT provides a three-stepflow model to explain responses by customers to service

performance relative to expectations. First,exposure to information describing a

servicesperformance characteristics leads to the formation of service specificbeliefs or

expectationsand actual experiences leads to a subjective calculationof disconfirmation by the

determines a satisfactionlevel that, in turn, influences subsequent behavior by the customer

(Venkatesh and Goyal, 2010).

Lazarus (1991) framework, these assessments are a function of customers cognitive